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07.21.2025

Bund: Three is a magic number

The German government surprised the market with the announcement of a fiscal easing package that was more aggressive and frontloaded than expected.


Although the plan looks ambitious, it seems that the authorities are serious about it, as the recently announced refunding plan for third quarter shows.

While trade policy uncertainty and an expected moderation in growth in second quarter and third quarter will likely slow down any increase in yields in the near term, we think the direction of travel for Bund yields is higher, particularly in the belly of the curve and at longer maturities, and we expect the upward movement will gather momentum once uncertainty around tariffs dissipates.

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Accordingly, we remain tactically LONG on Bunds, but we have raised the threshold to switch to NEUTRAL to 2.50-2.60% (previously, the threshold to take profit was set at 2.30-2.40%) and raise the accumulation bar back to 3.0-3.10% (from 2.70-2.80% previously).

While our model suggests that 10Y Bund yields could go as high as 3.50%, we expect a less sizeable increase, owing to our expectations that demand for German bonds will be solid going forward.

Strategically, we remain NEUTRAL, as in the medium term we expect the German fiscal package and its implementation to become the main theme in rates markets, possibly tilting the balance of risks for EA growth and inflation to the upside.



CHIARA CREMONESI 
Senior Rates Strategist








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